Risk Management

SEC to Increase Scrutiny of Mutual Funds

The agency is concerned about liquidity as a "market-wide risk" after the failure last year of a high-yield bond fund.
Katie Kuehner-HebertJanuary 11, 2016

After the failure last year of a high-yield bond fund overseen by Third Avenue Management, the U.S. Securities and Exchange Commission is stepping up its efforts to maintain liquidity in the markets amid the proliferation of hard-to-sell assets.

The SEC on Monday said in its annual report on exam priorities that in 2016 it would, among other things, require investment funds and advisers to make significant improvements in their risk management practices. Specific areas to address would include liquidity risk management, stress testing, the use of derivatives, and transition planning.

Mutual funds, investment advisers, exchange-traded funds and other registered investment companies may also be required to enhance their data reporting.

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“These new areas of focus are extremely important to investors and financial institutions across the spectrum,” SEC Chair Mary Jo White said in the report.

The focus on liquidity as a “market-wide risk” is a change from last year, when the SEC focused on ensuring retail investors were adequately informed about the risks of investing in more exotic mutual funds, according to Bloomberg.

The SEC recently had to contend with the failure of the $788.5 million Third Avenue Focused Credit Fund, which blocked clients from pulling their money because the fund couldn’t meet redemptions without selling holdings at steep discounts, Bloomberg said.

Other SEC priorities include advancing a new set of rules for improving equity market structure; develop potential rules for enhanced pre-trade transparency in the fixed income markets; working toward a stronger financial responsibility framework for broker-dealers, including through new capital and liquidity requirements; and developing a uniform fiduciary duty for investment advisers and broker-dealers.